Lattice Semiconductor Corporation Q3 FY2025 earnings call

Key Points

• CEO Fouad Tamer noted strong Q3 performance, upward trajectory of Lattice, increasing interest in low-power data center offerings, accelerated momentum for security and board management solutions, and acceleration of PQC technology adoption due to NIST requirements.
• CFO Lorenzo A. Flores mentioned revenue increased 7.6% quarter-on-quarter and 4.9% year-on-year, gross margin expanded, non-GAAP operating expense was in line with guidance, non-GAAP operating margin and EBITDA margin increased, and GAAP operating cash flow and free cash flow improved. Also, there was an accrual of stock-based compensation expense for PRSUs affecting GAAP operating expenses.

In the third quarter, revenue was $133.3 million, up 7.6% over Q2. Communications and computing grew 8% sequentially and 21% year-on-year in Q3 2025 to a record level. The Industrial and Automotive segment increased 6% sequentially. Revenue from new products continues to grow strongly. In terms of revenue contribution, communications and computing set a new record, with growth driving the overall performance.

Guidance for Q4 2025

• Revenue guidance midpoint is $143 million, equating to 22% year-on-year growth.
• Gross margin expected to be 69.5% ± 1% on a non-GAAP basis.
• Non-GAAP operating expenses expected to be between $54.5 million and $56.5 million.
• Income tax rate expected to be between 3% and 5% on a non-GAAP basis.
• Non-GAAP EPS expected to be between $0.30 per share and $0.34 per share.

Risks

• Subject to macroeconomic and industry conditions which could impact performance.
• Potential risks related to inventory normalization and supply chain issues in certain segments.

Q: Congrats on the results. You said you had increased confidence in your outlook for 2026. Is that confidence contingent on the expected normalization in industrial and auto channel inventory in Q4? Or can the strong comms and compute growth you guys are seeing more than offset any potential macro industrial and automotive softness?

A: This is Ford. As seen from Q3 results and Q4 guidance, comms and compute business revenue growth continues to accelerate and will further accelerate into 2026. Comms and compute as a percent of total revenue is increasing. Comms and compute business is growing faster than underlying CapEx. Industrial and automotive are on track to normalize inventory by end of 2025 and shift to natural demand. With both comms and compute accelerating and industrial and automotive recovering, 2026 revenue growth is expected to be strong.

Q: Congrats on the real shift in your tone. And I guess that's my first question is just around your confidence. Clearly, you outlined all the nice drivers there. But I guess what do you think has changed over the last 90 days that maybe has changed your confidence? It feels like that inventory is clearing up. And so you kind of talked about that last quarter. But just wondering if there's any demand issues or demand things that have changed driving that greater confidence?

A: Yes. We had a very successful Open Compute Summit. Attendees noticed an increase in activity and spend. Recent hyperscaler earnings show forecast for next year has been up. We're working closer with neo-cloud and enterprise vendors who are more aggressive in increasing AI CapEx. Adoption as companion chip for AI in data center and physical AI is accelerating.

Q: Thanks for the color about AI-related demand. And as we see an acceleration in AI demand, I guess we shouldn't read much into a little bit of a sequential slowdown in Q3 for communication and computing because it looks like that line was up 20% sequentially in Q2, up 8% in Q3. So first, should we assume a re-acceleration of the growth in communication computing in Q4? And is the strength in Q2 perhaps linked to the fact that this is the first quarter where inventory levels normalized? And as such, you kind of caught up with end demand and now you're back in line shipping with real end demand. Is that how we should read into this?

A: Yes. The guidance for Q4 shows significant sequential growth in comms and compute. The real driver of comms strength is server demand which is over 80% growth year-on-year. There's expansion of design wins and going from pre-Nexus to Nexus to Avant. Overall trajectory through time is strong.

Q: So Ford, I wanted to go back to your comment about data center at 60% of total for next year. So I think previously. 60%, right? Sorry, CNC, yes. So I think previously, you guys have said like 15% to 20% growth year-over-year that in I&A, inventories are normalizing by year-end. I think you guys reconfirmed that. I would have thought that just as that normalizes for I&A, it would create a great deal of growth for next year. So I would have assumed I&A is growing here. I mean there's 2 parts to that 60% comment that you made. CNC could be much higher, but also conversely, I&A could be much lower. And so I'm trying to balance that like to understand like what I&A growth could be next year. You also made the comment that next year is really the year of CNC and I&A is 2027. So trying to read the tea leaves, particularly for I&A. Are you thinking it is a much more flatter year than perhaps we are?

A: Let me start at the high level. I&A is expected to go back to growth next year, in the mid-single digit to 15% range. Comms and compute could be in the 20% to 40% range. We didn't want to drive expectations assuming bigger than mid-single-digit growth in I&A due to macro environment and inventory work.